The primary challenge posed by tax havens is the secrecy that obscures money once it has gone offshore. Most tax havens have strict secrecy laws that prohibit the disclosure of financial information to foreign parties. For example, if the IRS suspects you have undisclosed assets in a US account, they can easily get an order forcing your bank to disclose those assets. But if your assets are held in an offshore tax haven, it can be extremely difficult or even impossible to investigate an individual’s holdings. Even if they know the assets exists and where they are held, the courts in a tax haven may simply refuse the request. They may be cooperative in extreme cases such as the funding of terrorism or laundering of drug money, but in typical civil matters they will often refuse.
Thus, freed from government regulators, reporting requirements, and (if need be) shielded from investigators or auditors, there are a plethora of schemes available to the unscrupulous individual or corporation. Some of these schemes are rehashes of the simple kinds of fraud that most people are familiar, other are more complex, with new schemes being uncovered and undoubtedly many that have gone undetected. Here are a few examples:
TAX EVASION/NON-REPORTING OF INCOME
The most simple and common form of tax evasion domestically is the under-reporting or non-reporting of income and assets. While the majority of people’s income is immediately subjected to tax withholding and reported to the IRS, there are numerous sources of income that essentially rely on the individual to honestly report. Odd jobs, sales of goods, gifts, gambling winnings, and so forth. People commonly under-report or fail to report small amounts of income from these sources because there is no way for the IRS to track the innumerable amount of small transactions, especially those made with cash. But when it comes to large amounts, the IRS can and will compel US banks to disclose assets and can seize them fairly easily. Quite simply, it is very difficult and risky to hide assets in one’s home country.
But once money is moved offshore, there are rarely any automatic or mandatory reporting requirements. An individual or corporation can easily hide any profits made on investments done offshore. Unless the IRS or a court has reason to suspect the hidden assets, such as from a whistleblower or a disgruntled spouse, this fraud can easily be perpetrated. Even if the hidden assets are suspected, it can extremely difficult to prove in court. The tax haven is likely to be uncooperative (to protect its business interests), so the investigators will likely need to find smoking-gun documentation of the fraudulent activities. (However, these documents frequently are found by investigators since most people like to keep careful track of all their holdings.)
Perhaps the most dramatic play in the corporate tax haven playbook is transfer pricing. The notion of an “American Company” is truly anachronistic, as the world has become a global marketplace, and the loyalties of multinational companies are very much faced inward. Transfer pricing arises from this reality, as companies operating in dozens, and in many cases hundreds, of local markets around the world, need to account for their operations in a fragmented fashion. This is necessary because the tax liability of a multinational company is paid, theoretically, in each local country of operation, rather than on a singular global basis.
Corporate tax rates vary widely across the globe, from as low as 12.5% in Ireland to the mid-30s and higher in the United States, Japan and the UK, to name a few at the higher end of the spectrum. These marginal tax rates don’t do the divergence justice, as there are types of income fully untaxed in certain jurisdictions, and complex tax structures of such bewildering detail that television shows are made about them (Frontline: Tax Me If You Can). Transfer Pricing is legal, until it is not, and the devil is in the details. The IRS has announced that Transfer Pricing, and Section 482 of the Internal Revenue Code under which it is enforced, is amongst its highest enforcement priorities, though its track record is a mixed bag at best.
The Securities and Exchange Commission (SEC) has strict rules and reporting requirements around insider trading. The regulations preclude people with inside (non-public) knowledge of a company’s operations from using that information to make money on trading stocks or other securities. These laws keep company executives or owners from using their knowledge or decision-making power to make a killing trading their company stock. But by holding company stock in hidden offshore accounts, through shell companies, or in trusts, getting away with insider trading becomes much easier. The SEC is currently pursuing a $550 million case against Sam and Charles Wyly for an elaborate, decades-long insider trading scheme done through a network of trusts on the Isle of Man, a well-known tax haven in the Irish Sea.
By incorporating a shell company or trust and transferring assets to it, individuals or corporations can attempt to avoid tax liability because the new “owner” is an entity that is a resident of the tax haven, rather than their home country. This can be done with money, securities, or tangible property like homes. Asset holding strategies can frequently toe the line between legal and illegal. In the Wyly case mentioned above, the brothers secretly directed their trustees to purchase a ranch in Aspen for their family’s use. Such an abuse almost certainly violates the law, but proving that their enjoyment (or use) of the property constitutes ownership is tricky, especially when obscured by multiple layers of trusts.
Whistleblower Justice Network Can Help You
Whistleblower Justice Network partners with whistleblowers worldwide to expose large, institutionalized tax fraud. Utilizing whistleblower programs, including the IRS Whistleblower Program, the SEC Whistleblower Program, and the False Claims Act, we aid whistleblowers in bringing tax cheats to justice. Whistleblower Justice Network has extensive experience analyzing complex transfer pricing schemes, and filing whistleblower cases related to transfer pricing schemes it believes are unjustifiable.
If you have meaningful information regarding a tax scheme that you believe is illegal, robbing the United State of America of taxes it is owed, Whistleblower Justice Network can help. Working alongside world-class legal counsel, we will ensure you are protected to the fullest extent of the law and that you receive credit for the information you bring to the U.S. government. Partnering with whistleblowers is all we do. Visit us at www.whistleblowerjustice.net, or call us at 844-WJN-4ALL, to learn if we can help you.